Do you know what the Medium-Term Fiscal Framework is? A guide to understand it

During the last few weeks we have been hearing about the Medium Term Fiscal Framework. Economists from different currents, such as Juan Camilo Rastrepo and Diego Otero, and think tanks such as the Fiscal Observatory of the Javeriana University or ANIF, have expressed their views on the subject. But… what is the Medium Term Fiscal Framework and why does it generate so many reactions?

| You may be interested in: What does Colombia export to the world’s most populated country?

The main function of the Medium-Term Fiscal Framework is to provide the outlook for public finances for the next ten years. This promotes transparency and credibility in the State’s finances.

The following is a quick guide to understand what the Medium-Term Fiscal Framework is.

Where does the Medium-Term Fiscal Framework come from?

In the early years of the 21st century, international organizations such as the International Monetary Fund (IMF), the World Bank and the Organization for Economic Cooperation and Development (OECD) began to promote the construction of “medium-term frameworks”.

In 2001 the OECD made a systematization on the subject and in 2002 the World Bank made an exercise in the same direction.

In Colombia, the Medium-Term Fiscal Framework was born with Law 819 of 2003, which establishes organic norms on budget, responsibility and fiscal transparency. It establishes that the Framework must be submitted to the Economic Commissions of the Senate and the House of Representatives on June 15 of each fiscal year.

Law 819 lists nine elements that the Medium Term Fiscal Framework must contain as a minimum. Of these nine, the most relevant are: the Financial Plan, the macroeconomic program, the primary surplus goals, the estimate of contingent and enforceable liabilities, a report on the fiscal results of the previous fiscal year and the fiscal cost of the regulations issued the previous year.

The Medium-Term Fiscal Framework is a planning instrument with a ten-year perspective. It promotes transparency and credibility in public finances. In summary, the nine elements that make up the Fiscal Framework serve to provide a diagnosis of the strategies and results of revenues and expenditures. From there, a revenue and expenditure program is projected with their respective sources of financing for the next ten years.

| You may also be interested in: Blackrock vs Blackstone: the differences between these two financial powerhouses

What are the main components of the Medium-Term Fiscal Framework?

All the components of the Fiscal Framework are discussed in detail by Congress during the first debate of the Annual Budget Law. A brief explanation of the main components.

Financial Plan

The Financial Plan is prepared with the above projections.

The Financial Plan already appears in Law 38 of 1989, which regulates the General Budget of the Nation. Unlike Law 38, which established a period of “two years or more” for projections, as of Law 819 of 2003 the Plan is also prepared for 10 years and a new year is added each year.

The Financial Plan is a public sector financial planning instrument. It contains detailed projections of the Government’s actual revenues and expenditures, as well as the possible deficit and the way to finance it. In this sense, it gives the amount of the possible fiscal surplus or deficit that the government will have.

Macroeconomic Program

The Macroeconomic Program is an instrument through which the Government designs how it wants the economy to behave in the future. It is prepared for a ten-year horizon, as are the other elements of the Medium-Term Fiscal Framework.

Based on economic assumptions, the Macroeconomic Program projects the growth of the main macroeconomic variables such as GDP, external demand, international prices, among others.

Primary surplus

The country’s revenues are divided into current and capital revenues. In a simplified way, current revenues can be associated with taxes. Technically speaking, current revenues are total revenues, but do not include credit resources, privatizations, capitalizations or the profits of Banco de la República.

On the other hand, current expenditures can be associated with total expenditures, but without taking into account debt service. They are operating, investment and commercial operating expenses.

Having said this, the primary surplus can be explained as a positive value obtained by comparing current revenues and current expenditures.

Colombia can grow its economy with biofuels: the promise of energy transformation